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THE WALL STREET JOURNAL: As Gas Prices Soar, Limited Supply Makes Old Pump Wars Scarce

DEJA VU
By CYNTHIA CROSSEN
March 31, 2008; Page B1

In 1923, William McMaster, then governor of South Dakota, called the price of gas in his state — 26.6 cents a gallon (equal to about $3.16 today) — “no less than highway robbery.” Late that summer, he asked Standard Oil Co., which supplied most of his state’s gas, to reduce its price. When Standard said no, Mr. McMaster decided to cut out the middleman.

Using public funds, Gov. McMaster bought 160,000 gallons of cut-rate gas from a Chicago distributor and began selling it at a state depot for 16 cents a gallon ($1.94 now). He also announced that he planned to buy an additional half-million gallons and pump them at cost from several other state-owned stations.

A day after Mr. McMaster announced his idea, Standard Oil reduced gas prices in South Dakota to 16.6 cents a gallon. As governors of other Midwestern states sent telegrams to Standard Oil demanding the same deal, the price cuts spread to several other states. Eventually, Mr. McMaster and Standard negotiated a price of about 20 cents a gallon.

Today, gas prices seem to move in only one direction. But between the 1920s and 1970s, the cost of gas fluctuated wildly, falling — sometimes sharply — as often as rising. Lasting months and sometimes even years, price wars swept through cities, states and entire regions chaotically and often ruinously for small operators. “I’m broke, and I mean busted” because of the price wars, John Roessner Jr., a service station owner in Union, N.J., told a Senate subcommittee investigating the state’s price wars in 1955.

In one sense, the gas wars were, as a Kansas oil company executive said in 1964, “the good old competitive free-enterprise system at work.” Retailers, whether affiliated with a major company or independent, were free to set their own prices. The thinking was that once motorists realized that gas was a commodity, distinguished only by its price, the market would gradually stabilize, and companies would market their service, convenience or cleanliness rather than their price.

Instead, gas prices vacillated, sometimes dropping 50% or more overnight. “As soon as a price war ends in one place, it pops up somewhere else,” an oil company spokesman said in 1958. In the summer of 1963, one big oil company found 17 different retail prices posted for its brand in Los Angeles and 41 different prices in Portland, Ore.

Small, independent dealers and large national corporations blamed each other for the price wars. But it was very difficult to trace the genesis of any particular war, each service-station owner saying he was only playing catch-up with his competitors. “After 32 years of service-station operation, I still can’t tell you what starts price wars,” K. M. McGee, president of Texas Service Stations Associated, a trade group, said in 1962.

What made price wars possible was plentiful gasoline. The U.S. was producing all the crude oil it needed, its refineries were working under capacity, and gas stations were springing up across the country. Demand was lower, too; there were fewer cars and people used them more sparingly.

Some service stations made their profit selling gas, but others used inexpensive gas as bait for customers who might also buy higher-profit items such as oil, tires or batteries. When a service station lowered its gas price, it forced other stations in the area — often just across the street — to reduce their prices to compete. There could be several rounds of cuts, sometimes in a matter of hours.

Other gas wars erupted when big oil companies had excess supply or were competing for market share in a state or region. They offered lower wholesale prices to dealers in a “critical area,” and would lean on the retailers they supplied to pass the savings along to their customers. The oil company absorbed some, but not all, of the cost of the cuts.

Enormous “circus” signs trumpeted the discounts to motorists, who pulled up to the pumps in cars carrying an assortment of bottles, cans and barrels to fill and store in their garages. Instead of waiting until their tanks were empty, motorists “rushed the can,” topping them up with a gallon or two.

A particularly vicious price war broke out in New Jersey in 1950, when two-thirds of the state’s service stations announced they would shut down for eight days to protest suppliers’ demands that they cut their prices. The strike ended after two days when state officials persuaded the station owners that gas was a basic commodity affecting the public interest and national security.

Big oil companies such as Standard consistently denied that price wars were good for them. Time magazine in 1923 explained their position, saying, “First, they were blamed for keeping gasoline prices too high. But when they reduced prices to meet the competition, they were blamed for so doing on the grounds that they aimed to ruin the independent oil companies and thereby establish a monopoly.”

As oil became scarcer, especially after the Arab oil embargo of 1973, price wars largely vanished. They still break out occasionally but only briefly. That’s a win for some, a loss for others. In a price war in 1934 in Montreal, the independent Gollert Garage offered seven quarts of beer free with the purchase of five gallons of motor oil.

Write to Cynthia Crossen at [email protected]

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